Genesis Energy, L.P. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Genesis is a midstream master limited partnership operating offshore pipelines, refinery services, marine transportation, and supply and logistics businesses.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1.712 billion | $2.247 billion |
| Operating income | $206.4 million | $156.9 million |
| Net income attributable to Genesis | $113.2 million; $1.00 per unit | $422.5 million; $4.10 per unit |
| Cash flow from operating activities | $298.3 million | $289.5 million |
| Available Cash before Reserves (non-GAAP) | $384.2 million | $331.4 million |
| Segment Margin (management-defined measure) | $569.6 million | $476.6 million |
| Net interest expense | $139.9 million | $100.6 million |
| Long-term debt, net of issuance costs | $3.091 billion | $2.922 billion |
Revenue fell 24%, primarily because lower crude oil and petroleum-product prices reduced reported supply-and-logistics sales and costs. Management said commodity price changes generally affect both, with a smaller direct effect on Segment Margin. WTI averaged $43.32 per barrel in 2016, down 11% from 2015. Operating income increased, while net income attributable to Genesis fell sharply because 2015 included a $332.4 million non-cash gain from revaluing previously held interests in CHOPS and SEKCO. Excluding that gain, 2016 attributable net income was $113.2 million versus $90.1 million in 2015, up 26%.
Fourth-quarter 2016 revenue was $428.1 million, operating income $43.4 million, net income attributable to Genesis $22.1 million, and earnings per unit $0.19. The quarter’s reported distribution was $0.70 per unit; a $0.71 distribution was paid in February 2017 for the fourth-quarter period.
At year-end, cash was $7.0 million, current assets $359.6 million, and current liabilities $260.8 million. The $1.7 billion revolving credit facility had $412.3 million available, including applicable inventory and letter-of-credit availability. Debt comprised $1.278 billion drawn on the facility and $1.813 billion principal of senior notes. The facility matures July 2019; senior notes mature from 2021 through 2024. Genesis reported compliance with debt covenants. Interest rates on the revolver are variable; management estimated a 10% change in LIBOR would have changed 2016 net income by about $4.0 million.
Capital expenditures were $416.5 million, including $385.6 million of growth spending and $30.9 million of maintenance spending. Cash distributions to common unitholders were $310.0 million. The partnership issued 8 million units in July 2016 and received approximately $298.0 million net, which it used to repay revolver borrowings.
Material changes versus prior period
- Offshore pipeline Segment Margin rose 70% to $336.6 million, principally reflecting a full year of contribution from the 2015 Enterprise offshore asset acquisition and higher throughput on several systems.
- Marine transportation Segment Margin declined 32% to $70.1 million. Lower utilization and day rates affected the fleet; 2016 inland and offshore barge utilization was 91.4% and 90.5%, respectively, versus 96.7% and 98.7% in 2015.
- Supply and logistics Segment Margin declined 13% to $83.4 million, including weaker historical crude gathering and marketing activity and lower onshore pipeline throughput. Refinery services Segment Margin was nearly flat at $79.5 million.
- Cash flow from operations increased modestly, but working-capital changes used $90.7 million of cash in 2016, compared with a $5.4 million source in 2015.
- Net interest expense rose by $39.4 million and depreciation and amortization increased by $72.1 million, reflecting acquired and newly placed-in-service assets and their financing.
Outlook, commentary, risks and unusual items
- Management emphasized financial discipline and restoring financial flexibility, noting that it issued equity and lowered the future growth rate of quarterly distributions. It did not provide a specific earnings or distribution-growth forecast.
- Genesis expected approximately $100 million of 2017 spending, including capitalized interest, on projects then under construction. Houston-area pipeline and terminal work and the Raceland, Louisiana terminal were expected to become operational in the first half of 2017. Management expected project contributions to ramp through 2017 and into 2018, while acknowledging schedule slippage and a potentially slower ramp.
- Management expected leverage to decline after completion of organic growth projects as excess available cash was used to reduce debt. This is an expectation, not a quantified leverage target.
- Key risks include substantial indebtedness and covenant restrictions; access to debt and equity capital; commodity downturns and reduced producer drilling; volume and customer concentration; competition and underutilized leased assets; variable interest rates; marine-market weakness; environmental, safety, weather and cyber risks; and Jones Act, regulatory and partnership-tax risks.
- Shell generated 12% of consolidated revenue in 2016. Separately, Phillips 66’s Westlake, Louisiana refinery accounted for approximately 60% of sulfur-removal NaHS by-product volumes; the related contract extends through 2026 but includes force-majeure provisions.
- Unusual items included the 2015 $332.4 million non-cash acquisition-related gain, a $19.2 million 2015 debt-extinguishment loss, and a $6.0 million non-cash 2016 valuation allowance for disputed receivables and claims. The allowance for doubtful accounts increased to $6.5 million from $1.4 million.
- Management said pending legal matters were not expected to materially affect financial position or results. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded internal controls were effective.
Most important facts for investors to verify
- Whether the Houston and Raceland projects entered service on the expected schedule, achieved planned volumes, and delivered the economics management anticipated.
- Debt, covenant headroom, revolver availability, refinancing plans, and actual progress in reducing leverage.
- Whether operating cash flow and Available Cash before Reserves sustainably support distributions and capital spending; note that Available Cash before Reserves is non-GAAP and depends on company-defined adjustments.
- Marine fleet utilization, spot-market exposure, contract renewals, and the pace at which excess industry capacity is absorbed.
- Offshore throughput and customer commitments, including the concentration of refinery sulfur-removal volumes tied to Phillips 66 and the revenue exposure to Shell.
- The status and collectibility of disputed receivables and claims, environmental obligations, and the $213.7 million recorded asset-retirement obligation.